Whx Corporation v. Securities And Exchange Commission

362 F.3d 854 (D.C. Cir. 2004)


D attempted a hostile takeover of Dynamics Corporation of America (DCA). DCA's charter had a poison pill that allowed shareholders to purchase new shares at rock-bottom prices if any party acquired 20 percent of DCA's stock without the approval of DCA's board. Further, New York law (New York Business Corporation Law § 912(b)) forbids a New York corporation from entering into a 'business combination' with any shareholder owning 20 percent of the corporation's stock until the shareholder has held the stock for at least five years, unless the shareholder first secures board approval. D planned a two-stage takeover strategy. D made a cash tender offer for 19.9 percent of DCA's common stock, offering $40 a share. D would then conduct a proxy contest seeking to oust the DCA board and replace it with a new one that would revoke the pill and approve a merger with D. Under the terms of this merger, D would purchase all remaining DCA shares for $40 cash. The next annual DCA shareholder meeting was scheduled for May 2, 1997. But the record date for that meeting was March 14, 1997, which had already passed. Only holders of record or their proxies could vote. D proposed to include a condition under which the offer would extend only to those shareholders who were holders as of the March 14 record date, or who were able to obtain a valid proxy. D recognized that this condition might be thought to violate the so-called All Holders Rule promulgated under §14(d) of the 1934 Securities Exchange Act. P explained that, without this rule, the 'equal treatment' provisions of the Exchange Act would easily be circumvented: an offeror could simply address an offer to 'a privileged group of security holders who hold the desired number of shares' rather than purchasing the desired number of shares from all tenderers on a pro rata basis for the same consideration. D faxed P's asking for either a no-action letter or an exemption from the rule. A staffer at P immediately informed D that P did not issue no-action letters on All Holders Rule issues and that D should withdraw its no-action letter request. D did so that afternoon. D decided to proceed in light of its counsel's belief that there were strong arguments why the condition did not violate the All Holders Rule, and the lack of contrary P precedents. It announced the conditioned tender offer. P decided to speak and told D that the condition violated the All Holders Rule and was prepared to recommend enforcement action to enjoin the tender offer unless D withdrew the condition. D authorized an enforcement action to enjoin the tender offer. D immediately withdrew the record holder condition. This withdrawal eliminated any occasion for injunctive action, and D proceeded with its takeover bid, which ultimately failed because of a competing bid by a 'white knight.' Over a year later, P started cease-and-desist proceedings against D under Section 21C of the Exchange Act. An Administrative Law Judge found no violation of the All Holders Rule. P reversed the ALJ and imposed an order requiring D to 'cease and desist from committing or causing any violations or future violations of Section 14(d)(4) of the Securities Exchange Act. P found that a violation of the All Holders Rule required neither scienter or negligence nor a finding of harm. D appealed.